Life Insurance and the Threat of a Flu Pandemic

I was looking at the Insurance Information Institute website, and came across an article on the potential impact of a global flu pandemic on the life insurance industry.

While I find it hard to feel sorry for insurers, this is one case where I suspect that neither insurer nor insured would be happy. Insurance is all about managing risk -- not just for you when you buy it, but also for the insurer when they sell it.  Obviously, if too many people collect, especially all at the same time, then the insurer will suffer financially. In fact, back in the 80's, I worked on the liquidation of an insurance company. Frankly, this company did not manage its finances well, and its reserves for claims were too low. A rare occurrence to be sure, but it meant that each person who had an outstanding claim at the time the company was declared insolvent received only pennies on the dollar for their claim.

The same thing could happen for people with life insurance, if the insurer couldn't pay all the life claims and became insolvent.

Financially weaker insurers would likely fail in the case of a pandemic. The insurer would need to have really good cash reserves in order to meet the demands of a large number of death claims all at once. Also, since the fear is that a flu could kill those who are otherwise young and healthy, an insurer might not be collecting big enough premiums to cover losses, because the risk calculated was not high enough. This could create problems for even big, financially-stable insurers.

Which makes me think that we could see insurance premiums go up in the near future. After all, the insurer has the liberty of largely setting their own prices. There's little in the way of legislation in most of North America that holds them in check.

So, I'd have to say that if you think there might be a chance of a global flu pandemic -- and you want to have a reasonably priced life insurance policy -- you might want to buy one now and lock in the premium amount. If the risks of a global pandemic increase, you can bet that the insurance companies will be increasing their premiums in anticipation of having to pay more claims. And once the prices go up, in most cases, they stay up.

Monique L. Attinger
Posted by on October 27,2006 at 8:23 AM
I'm actually wondering if this is exactly the kind of "excuse" that insurers need to raise rates on insurance! While I think it's a concern that has to be treated with some seriousness, I also think that many criteria, not necessarily related to the insurance being provided, are now being used to justify increased rates. I think we do need to have our regulators pay attention that insurers are doing the right thing with their cash reserves for claims, rather than charging more and more premium.
Posted by Mark on October 26,2006 at 9:56 AM
This flu pandemic stuff creates exactly the kind of crapshoot that insurance companies hate. I've heard some experts compare the risk of this disease to that of the Spanish flu pandemic that reeked havoc on an entire generation of people in the years immediately after World War One. I've heard other experts say this thing will mostly be another Y2K. What's a lowly insurer to do? But even if the truth rests somewhere in the middle, it could be a bumpy road ahead for those who insure people's lives.
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